Books of 2011: 5. Priceless, by William Poundstone

Oscar Wilde once said, "The cynic knows the price of everything and the value of nothing." William Poundstone might argue that the average person doesn't know the price of anything, either. Or, rather, that prices are arbitrary constructions that aren't really based on value at all.

Priceless is a foray into behavioral economics and social psychology as they apply to price and money. A lot of the research Poundstone brings forward I knew about already, and giants in the field (such as Tversky, Kaneman, and Ariely) are amply represented. But really, Priceless is a walk through our own minds and how we come up with the price we're willing to pay for things, especially when we have no reference points.

Taken together, the results of all this research could be disheartening. They show that people are easily manipulated by "anchors" (i.e. a reference number, which may be completely random), even while insisting that anchors have no effect on them. People will pay more for a steak dinner (or anything else, really) if there's a super-expensive option presented that no one buys. Just having the super-expensive $150 steak on the menu makes your $50 plate of chicken seem far more reasonable a purchase.

And on and on. Why did the jury award $2.9 to Stella Liebeck in the infamous "I spilled coffee on my lap" case against McDonalds? Because her lawyer suggested that the jury award punitive damages equal to "one or two days of the company's worldwide coffee sales." This is completely arbitrary (why worldwide? why coffee sales? why a day or two?), but it framed the question and led to the multi-million dollar fine.

Priceless demonstrates that people pay astronomical prices for things they don't want. They'll claim one deal is better and yet consistently chose another. Their interactions with strangers change when there are other people looking, or even just a picture of eyes. Their preferences change drastically when even a small amount of uncertainty (1%) is introduced. Or when they're presented with something "free." And, through everything, they'll continue to insist that these criteria have absolutely no effect on them.

It's a fascinating read and worth it to know (and attempt to counter) your internal biases. Recommended.